Financial pros cool to prospects for Facebook shares

Posted: August 23, 2012

Plenty of people liked Facebook Inc. enough to buy shares of its common stock when the social-media network went public May 17.

But now that those shares are worth about half the $38 price of the initial public offering and company insiders are selling, what are investors and investment advisers saying?

Pretty much the same things they were saying before the Menlo Park, Calif., company became the most-hyped IPO of 2012. It may be a cultural phenomenon with a large base of users, profits, and growing revenue, but Facebook as an investment? Beware.

Hot initial public offerings generally have investors clamoring to get in the door early and own a piece of what they hope will become the next Apple Inc. or Google Inc.

Even knowing that most IPOs generally trade below their offering price a year later doesn't dissuade people from buying into a story stock. And Facebook - the subject of a major motion picture and many books and the object of obsession for many of its nearly one billion users - has been quite a story.

Nicholas Newcott of Charlotte, N.C., bought $4,000 worth of Facebook several days after the IPO, when shares had slipped to $31. While not a day-trader, he buys and sells individual stocks through his Scottrade account but never jumps into IPOs. "All IPOs drop in the beginning," he said.

Newcott said he thought he was getting into Facebook at the right time. "I thought I hit at the bottom," he said.

The last few weeks show that Newcott's instinct was wrong. Facebook has never closed above its first-day closing price of $38.23 on May 18. Shares closed Tuesday at $19.16, nudging just above a recent low of $19.05, reached Friday. The company has lost nearly half its market value since its IPO.

Facebook may be a household name with consumers, but institutions control 71 percent of Facebook's 674.6 million shares outstanding, according to data compiled by Bloomberg News. It's impossible to know how many individuals bought shares through stockbrokers or online trading firms, seeking Internet riches despite the challenges of Facebook's business model.

Daniel Roccato, an investment adviser, said he had warned his clients to stay away from Facebook based on his 20 years of experience working with institutional clients at Morgan Stanley and Merrill Lynch.

To Roccato, president of Quaker Wealth Management L.L.C. in Moorestown, which has about $75 million under management, IPOs are a "bad deal" for individual investors. He cited data from Hoover's Analytics that indicates nearly two-thirds of all IPO stocks sell for less than their first-day price one year after going public.

His fee-only investment-advisory firm did hear from some clients who seemed eager to scoop up Facebook shares at the IPO, including an 80-year-old man and a 26-year-old social-media fan. Both wound up not buying Facebook shares after listening to Roccato's concerns.

Cassandra M. Oryl, principal of Slice Communications, a Center City firm that helps business clients with advertising strategies on Facebook, also chose not to invest in the social network's common stock. "To me, it seems like a risky investment," she said.

However, Facebook has proven to be a good marketing tool for businesses trying to connect with customers and other audiences, Oryl said. "Facebook is able to provide data and analytics on audiences that other marketing tools can't," she said.

Even with all of the business challenges facing Facebook, Oryl's social-media and public relations firm will keep doing business over it because of the huge numbers of people all over the world who use it.

Cassandra Toroian, president and chief investment officer of Bell Rock Capital L.L.C., isn't sold on Facebook's longevity.

"When I look at Facebook, yes, it has a tremendous platform of users," said Toroian, whose investment-advisory firm in Rehoboth Beach, Del., has accounts worth about $250 million under management. "But I'm not sure that is translating into revenue as much as it should be."

One firm that didn't have a choice in whether to buy Facebook shares was Vanguard Group, best-known for mutual funds that mimic various stock indexes, such as the Standard & Poor's 500. Malvern-based Vanguard had to buy Facebook common stock for its Vanguard Total Stock Market Index Fund, which is made up of 3,296 stocks and had total assets of $191.8 billion as of July 31.

It's not clear what prices the mutual fund giant paid to build its stake of 5.59 million Facebook shares as of June 30, according to the list of the fund's portfolio holdings on Vanguard's website. On June 30, those shares were worth $174.0 million. As of Tuesday's closing price, that investment had lost $66.9 million, to $107.1 million.

When Facebook hit $26 a share, Newcott said, he sold his holdings. But he recently began buying Facebook again after the news that restrictions on share sales by pre-IPO investors - who control about 1.9 billion shares - were beginning to expire.

Now with about $12,000 invested in Facebook over a period of days, Newcott said he sees a lot of potential in a company that has a large user base and growing revenue, and had been profitable until its most recent quarter.

Newcott, who works in tech support and said he actively tracks about 20 stocks for investment purposes, offered this hope: "What goes down a lot must come up."

Investors in Research in Motion and Nokia, once the two dominant mobile phone makers, may beg to differ. Their stock prices remain crushed. The question for Facebook investors is whether a return to the $38 level is in their timeline's future.


Contact Mike Armstrong at 215-854-2980 or marmstrong@phillynews.com, or follow on Twitter @PhillyInc.

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